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A Yarn Company Caught in the Grip of Globalization The Challenge A large yarn manufacturing company's fortunes fell with the impact of globalization. The domestic spinning industry as a whole was losing 15% market share every year, as the manufacture of textiles shifted to Asia and Central America. At the same time, the price of cotton was increasing, and the company was not able to pass the costs down the supply chain. As a result of these market forces, the company had defaulted on its loan covenants, and asked its lender, a multi-bank syndicate, for a period of forbearance. Suppliers were stretched beyond sixty days past due. The company's pension plan was seriously under funded. And the board of directors was not sure that management's plan to shut down three manufacturing plants was sound. ABTV was brought in, on an interim management basis. The Art of the Rebound ABTV quickly analyzed the shutdown plan, and determined that one plant should be closed immediately and the others continue to operate for the short term to fulfill current, profitable orders. The interim executive negotiated payment terms with suppliers, and reworked the loan covenants and amortization schedules. Meanwhile, the external climate worsened. The leading bank in the lender syndicate decided that it would no longer include textile companies in its loan portfolio, at the prospect of the lifting of free trade agreement quotas. Domestic yarn companies began to fail or downsize, one after another. The stock market plummeted, and the value of the employee pension dropped to the point of showing a $12 million deficit. Fulfilling the legal obligation of restoring the fund at the rate of $2 million a year would have consumed every bit of the company's uncommitted cash. Even with all the negative forces operating, cash flow improved by over $8 million and suppliers were kept at bay until two major customers switched to offshore suppliers. The Outcome Caught between its legal obligation to build up the pension fund and the unwillingness of lenders to take on the risk of textile spinning companies, there was no way the yarn company could survive and thrive. ABTV recommended a wind down starting with closing all but two of the plants, with the longer term plan of selling the remaining assets in a bankruptcy sale. The company was liquidated in bankruptcy and all secured obligations were met. The unsecured creditors received a significant return on their claims. |
